Littelfuse, Inc. (NASDAQ:LFUS) Q1 2023 Earnings Call Transcript

Littelfuse, Inc. (NASDAQ:LFUS) Q1 2023 Earnings Call Transcript May 3, 2023

Operator: Good day, everyone, and welcome to the Littelfuse First Quarter 2023 Earnings Conference Call. Today’s call is being recorded. At this time, I will turn the call over to the Head of Investor Relations, Trisha Tuntland. Please proceed.

Trisha Tuntland: Good morning, and welcome to the Littelfuse first quarter 2023 earnings conference call. With me today are Dave Heinzmann, President and CEO; and Meenal Sethna, Executive Vice President and CFO. Yesterday, we reported results for our first quarter and a copy of our earnings release and slide presentation is available in the Investor Relations section of our website. A webcast of today’s conference call will also be available on our website. Please advance to slide two for our disclaimers. Our discussions today will include forward-looking statements. These forward-looking statements may involve significant risks and uncertainties. Please review yesterday’s press release and our Forms 10-K and 10-Q for more detail about important risks that could cause actual results to differ materially from our expectations.

We assume no obligation to update any of this forward-looking information. Also, our remarks today refer to non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure is provided in our earnings release available in the Investor Relations section of our website. I will now turn the call over to Dave.

David Heinzmann: Thank you, Trisha. Good morning, and thanks for joining us today. Let’s start with highlights on slide four. Our global teams delivered strong first quarter results above our sales and adjusted EPS guidance within a tougher electronics environment. The continued resiliency of our business model and the strength of our execution drove strong overall profitability. During the quarter, we made significant progress integrating our strategy led acquisitions to drive long-term profitable growth and securing meaningful new business wins, then the global structural themes of sustainability, connectivity, and safety. I want to thank our global teams for their persistent commitment and execution to serve our customers.

Moving on to slide five. As announced in February, we continuing to invest for growth with our acquisition of Western Automation Research and Development Limited, a designer and manufacturer of electrical shock protection devices with a heavy focus on electrification. This acquisition accelerates our growth in eMobility off board charging infrastructure, particularly in Europe, with its strong OEM relationships and further expands our capabilities and diversifications in the higher-growth industrial end-markets like industrial safety and renewables. The integration is underway and we look forward to leveraging our combined capabilities to drive growth consistent with our five-year growth strategy shown on slide six. Before we get into business design wins, I would like to start with the customer and market dynamics we are seeing.

Starting with our channel partners, as expected, we continue to see electronics distributors drive the reduction of their inventory levels during the quarter. We expect this inventory reduction will continue into the third quarter at current POS levels which remained stable. Our electronics book-to-bill continues to run below one, largely due to our reduced lead times. Our Industrial distribution partners continue to hold inventory within normal targeted ranges. We have a healthy industrial backlog for the second quarter and end-market demand remains relatively consistent with what we said 90-days ago. We continue to see soft demand in consumer-facing and personal electronics end markets. But end market demand remains strong across high-power applications like renewables, industrial automation and safety, medical, power supplies, and electrification of vehicles and vehicle charging infrastructure.

Across transportation end-markets, we saw continued inventory unwind at Tier 1s and OEMs and at distributors for commercial vehicle applications. In our Passenger Vehicle markets, we saw solid content outgrowth across our product portfolio during the quarter, and we continue to expect long-term double-digit content outgrowth based on significant design wins in electrification and electronification. Across commercial vehicle markets, we are positioned for long-term growth with the ongoing electrification and electronification in material handling, agriculture and construction equipment, and heavy-duty truck and bus. I am particularly proud of our strong first quarter performance as we successfully navigate this period of inventory rebalances and varying end-market trends across our businesses.

Our global execution continues to deliver strong financial results and company margins consistent with our long-term targets. Meenal will provide additional color on our financial performance and outlook. Now, let’s move on to business design-wins during the first quarter. The convergence of sustainability, connectivity, and safety is propelling meaningful opportunities across the industrial, transportation, and electronics end-markets we serve. Our diversified technologies and capabilities play a significant role in the advancement of these themes, which is driving unprecedented demand for our innovative and reliable solutions. Our industry awards received this quarter recognize us as a top supplier of best-in-class innovative solutions, driven by our unwavering commitment to customers.

We continue to capitalize on the design rich environment, which will drive our long-term growth. Within the industrial end-markets on slide seven, we continue to play a critical role enabling high-power applications related to sustainability and safety. The diversity of our business wins highlights our ability to globally serve customers. In renewables, the strength of our product offering won a significant business for energy storage systems. Within industrial safety and power supplies for manufacturing equipment, our application expertise captured business wins for Industrial Automation and our solutions, including those from our C&K Switches acquisition secured business based on product features. In commercial HVAC, we won business with our deep relationships and broad portfolio.

Our expanding product content and the rate of new business wins continues to grow with leading customers based on our capabilities and intensifying focus on enabling applications around sustainability and safety. Turning to our transportation end-markets on slide eight. Our investments for growth are extending our global leadership position within customers. Our joint collaboration focused on sustainability, connectivity, and safety drove significant new business. In passenger vehicles, we continue to grow with major OEMs based on our early engagement, technical support, and breadth of high voltage products. We won business with the ongoing electrification of platforms in battery management systems and onboard chargers. With an expanded focus towards sensors within electrification applications, we also secured significant new business in power management.

Within electronification, we captured business in telematics and comfort and convenience applications. We also continue to expand our business in traditional low voltage applications based on our proprietary technologies and superior design. Our design-wins and pipeline of business opportunities support the continuation of long-term double-digit content outgrowth. In electrified commercial vehicles, we leveraged our expanded capabilities from the Carling and Embed and TEGNA acquisitions to win global business with major OEMs. We won new business in delivery vehicles, trucks, and two-wheelers for battery management systems, power distribution, and body control modules. In rail traction for trains, we won business in high voltage power converters.

In electronification of commercial vehicles, we won business in delivery fleet vehicles with GPS trackers and in construction equipment for digital switching keypads. In broader commercial vehicle markets, we increased our product content in heavy-duty trucks and material handling based on our global support and long-term quality. Our off-board charging infrastructure, our engineering capabilities, and differentiated range of products such as our power semiconductors, electronic components, and fuses secured significant business. We look forward to accelerating our long-term growth in upward charging applications with our comprehensive offerings, expanded further with our newly acquired Western Automation Products. We are confident in our investments for growth within transportation applications will strengthen our market leadership.

Moving on to slide nine. Sustainability and connectivity, and safety are drivers for growth in the electronics end-markets. With the ongoing push towards efficiencies, our responsiveness, global reach, and product features, one is business in water meters and LED lighting. As it relates to greater connectivity requirements, our technical support and broad portfolio, including products from this addition of C&K Switches won us business in communications infrastructure, home technologies, and power supplies for electronic devices. Our products are vital to safety and protection of human life as we secured business within critical lifesaving medical devices. The pipeline of business opportunities is robust and we are extremely well-positioned to expand our electronics content across a wide range of applications focused on sustainability, connectivity, and safety.

Our new business wins represent a very diverse range of end-markets applications and geographies. As we engage with our customers’ engineering teams, our collaborations are accelerating next-generation product development and design-in activities. We fully expect the organic growth from new business activities, coupled with our acquisitions will enhance and sustain our long-term growth. I will now turn the call over to Meenal to provide additional color on our financial performance and outlook.

Meenal Sethna: Thanks, Dave. Good morning, everyone, and thanks for joining us today. Let’s start with slide 11. We’re pleased with our performance for the first quarter, finishing above our sales and earnings guidance range. Revenue of $610 million in the first quarter was down 2% versus last year and on a sequential basis it was essentially flat. Revenue was down 8% organically versus the prior year with acquisitions adding 7% growth and foreign exchange reducing revenue of 1%. GAAP operating margins were 18.1%. Adjusted operating margins of 19% finished at the high-end of our target range and adjusted EBITDA margins were above our target range, finishing just under 25%. We drove strong margin performance, realizing the benefits from our portfolio diversification, continued efforts on price realization, and ongoing operational execution despite the challenging electronics environment.

First quarter GAAP-diluted earnings per share was $3.54 and adjusted diluted EPS was $3.64. Our GAAP effective tax-rate was 18.5% and adjusted effective tax rate was 18.8%, finishing within our expectations. We generated operating cash flow of $53 million and free cash flow was $28 million in the quarter, up 26% from the prior year period. We continue to balance continued inventory investments to serve many of our customers, while reducing some inventories as supply chain challenges moderate in certain areas. As per our typical seasonal trends, we expect to drive stronger cash generation in the back part of the year. During the quarter, we welcome the Western Automation team to Littelfuse. Incorporating this acquisition, we ended the quarter with net-debt-to-EBITDA leverage at 1.4 times, below the low-end of our 1.5 times to 2.5 times target range.

Our balance sheet remains strong with over $400 million of cash on hand and ample available capacity on our credit facility. We are well-positioned to continue our disciplined capital allocation strategy prioritizing investments for growth while also returning capital to our shareholders. Let’s move to first quarter segment highlights, starting with Electronics on slide 12. Sales were down 2% overall and 12% organically. The difference largely from last year’s acquisition of C&K Switches. Despite the sales impact from expected channel inventory rebalancing, operating margins finished at just over 25%, while adjusted EBITDA margins approached 31%, both up sequentially. We continue to drive margins well above our historical target levels, a product of content growth, pricing discipline, and top-tier operational execution.

Moving to our Transportation segment on slide 13. Organic growth was down 8%. Passenger vehicles were down 6%, and commercial vehicles down 9% organically. As Dave mentioned, we continue to see customers and distributors reducing their inventory levels in the quarter. Operating margins were over 5%, expanding a 160 basis points sequentially, while adjusted EBITDA margins grew 180 basis points to nearly 12%. We continue to drive additional price realization and have taken further cost reduction actions to align to the current business environment. We’re also in process of some operational footprint adjustments and expect these activities will continue to drive an improving margin trajectory. On slide 14, our Industrial segment drove another strong quarter of above market growth with organic sales up 13%.

We continue to prioritize higher growth areas such as renewables, energy storage, and industrial automation and safety. Operating margins finished above 20% and adjusted EBITDA margins above 24%, both improving significantly sequentially and versus prior year. Turning to the forecast on slide 15. Market trends remain similar to what we thought through the first quarter. We expect continued growth across Industrial and electrification themes with more modest growth across passenger and commercial vehicle markets. Certain electronics end markets remained soft, and we expect Electronics distributor inventory rebalancing continuing into the third quarter. We also expect a modest continuation of customer and distribution inventory reductions affecting our Transportation segment.

With this backdrop, we expect second quarter sales in the range of $607 million to $633 million. At the midpoint, we project sales to be flat versus last year with an organic decline of 7%. Sequentially, we expect growth in total sales across our Transportation and Industrial segments, partially offset by a decline across Electronics. We expect adjusted EPS to be in the range of $3.20 to $3.45, which assumes a 16% tax rate. Our second quarter guidance also includes higher stock-compensation expense due to retirement provisions, equating to approximately $0.25 of EPS. Slide 16 includes some additional news for the full year of 2023. We expect foreign exchange to have about a 35% unfavorable impact on EPS and neutral impact to our sales at current exchange rates.

We expect to maintain our company average operating margin within our long-term target range of 17% to 19%. And other full year modeling items, we now expect $67 million in amortization expense. And as noted last quarter, we are assuming $40 million in interest expense at current interest rates, a full year tax rate of approximately 18% and we expect to invest $110 million to a $120 million in capital expenditures. The ongoing resiliency of our business model and diversification of our portfolio were significant drivers of our strong Q1 sales and earnings performance. And we expect it to continue driving long-term value for our stakeholders. Looking through the uncertainties in the current macro-environment, we remain focused on what we can control, balancing our execution to market choppiness, while continuing to invest for the broad array of growth opportunities we see ahead of us.

Thank you to our partners around the world for your trust and commitment to us and to our teams for driving value for our stakeholders every day. And with that, I’ll turn it back to Dave for some final comments.

David Heinzmann: Thanks, Meenal. In summary, on slide 17, we are off to a strong start this year. Our performance within this dynamic environment speaks to the resiliency of the Littelfuse business model and the strength of our growth strategy, a combination of which has delivered double-digit sales and earnings growth over the last 5, 10, and 15 years. Over this time, we have expanded our leadership presence in high-growth end-markets, technologies, and geographies, which has diversified our business and improved the resiliency of our profitability. Our experienced teams have honed our playbook to successfully manage through dynamic environments. As we continue to manage through some near-term market challenges, we are confident that our ongoing execution, diversification, and strategic investments for growth will deliver sustained long-term value for all of our stakeholders. And with that, I will now turn the call back to the operator for Q&A.

Operator: Sure.

Meenal Sethna: We’ve operating cash flow of $53 million and free cash flow was $28 million in the quarter, up 26% from the prior year period.

Q&A Session

Operator: Our first question will come from the line of Joshua Buchalter with Cowen. Please go ahead.

Meenal Sethna: Good morning, Josh.

Joshua Buchalter: Hi, thanks. Good morning. Thank you for taking my questions and congrats on the resilient results. First, I wanted to clarify some comments you made on the channel inventory situation in your Electronics segment. It sounded like, Dave, you mentioned that there were healthy levels. But that the correction was going to be last into the third quarter. Could you just clarify, should we expect, I guess, a down in the second and third quarter for in your Electronics segment? Thank you.

David Heinzmann: Sure, Josh. So, we’ve obviously talked about the distribution in the Electronics side of our business and our partners there. That remains elevated and above kind of our normal operating ranges that we would expect. The good news is that it is in almost all categories declining on a month-to-month basis. So, that inventory reduction is happening in the channel, kind of as expected. We do expect though it will take some time to bleed that down. The good news is the POS, the sell-through with our distributors remains pretty stable. So we kind of model that and we do expect that it’s going to take us kind of into or through the third quarter to really work our way through that given the current POS levels.

Joshua Buchalter: Okay, so getting more healthy and there’s still some work to do is sort of the takeaway?

David Heinzmann: Yes. We knew they were elevated. We’ve kind of built into our modeling and the guidance that we gave for the first quarter and into the second quarter that it will continue to bleed down. The good news is it’s behaving kind of as expected.

Joshua Buchalter: Okay, got it. Thank you. And then for my follow-up, I wanted to ask about gross margin. I mean, you did essentially flat revenue and margins expanded over 200 basis points. Can you walk-through some of the drivers there and in particular, any update you can give on the pricing environment? It sounds like and given the results you’re still comfortably able to pass along higher input costs and that pricing remains firm, we’d love to hear your commentary there? Thank you.

Meenal Sethna: Sure. Yes, really around gross margin, right? It’s the nice balance that we have across our portfolio, some good strength and continued elevation on the electronics margins even despite as Dave talked about. We’re in the midst of the channel rebalancing of inventory and then also some good uptick on our industrial business, as well and we’ve targeted as we’ve talked about historically high-teens margin profile. The business continues to grow at an above market rate and some good margin profile there. It’s coming through as part of that volume.

Joshua Buchalter: Thank you. I’ll hop back in the queue.

Trisha Tuntland: Great, Josh. Thank you. We’ll take our next caller, please?

Operator: Your next question comes from the line of David Williams with Benchmark. Please go ahead.

Meenal Sethna: Good morning, David.

David Williams: Hey, good morning. Thanks for taking the questions and congrats on the solid execution and navigating this environment.

Meenal Sethna: Thank you.

David Williams: Yes, so maybe first just kind of thinking, I wanted to ask, you talked about the footprint adjustments. And just curious if you could give us a little more detail there on what the expectation is and maybe what that incorporates?

Meenal Sethna: Sure. We with — David with across our Transportation segment at the end really across our business, given the size, given the number of acquisitions that we’ve been doing over the past few years, one of the areas of synergies that we look at are just overall when we think about the real estate portfolio that comes through the acquisitions versus what we have. We take a look at where there are opportunities for us to consolidate, whether it’s non-manufacturing sites like sales offices are pretty easy. And when it comes to more manufacturing supply chain locations, it will take a little more planning, little more time. So, especially with our Carling acquisition that we made, pretty large acquisition, pretty broad footprint.

So there’s some activities that we’re doing there. And then I’d call also — I talked about the normal course of business that we have, as our business evolves and it grows, we look at some product line movements that we do, again, ordinary course of business.

David Williams: Okay. Anything in terms of magnitude of the savings you would expect to flow through?

Meenal Sethna: Yes. We — it’s part of the overall progression that we’re talking about as it relates to margins. The margins improved for the Transportation segment on a sequential basis. We continue to expect improvement as we keep going through the quarters, not still, not where it needs to be, but we’re going to make improvements in this as a part of that.

David Williams: Okay, great. And then just one last one real quick is, just geographically are you seeing anything in terms of maybe demand improving or where there greater levels of inventory? Just kind of thinking about Asia and Europe and the U.S., anything in particular to call out there?

David Heinzmann: Yes. I think, maybe just a little color on that. If you look at, obviously, we’re kind of going through inventory rebalances and things like that and there are some end market dynamics that are shifting. Certainly, if you look at our first quarter, the region that was the softness and was down the most was Asia by a meaningful amount. And that’s driven by inventory rebalancing, as well as some of the end-markets, so I think in electronics, some of the consumer-facing sorts of goods, which we’ve talked about for the last couple of quarters, that continues to be soft. Also car builds were pretty soft in China during the first quarter as well. So Asia was by far the region that was down the most. North America was also down but not near as much as Asia was. And most of that really being driven by inventory rebalancing. Europe was actually up for us from an organic standpoint. So we saw some growth in Europe.

David Williams: Thanks so much.

Trisha Tuntland: Thanks for your questions, David. We’ll take our next caller, please?

Operator: Our next question comes from the line of Luke Junk with Baird. Please go ahead.

Trisha Tuntland: Good morning.

Luke Junk: Good morning, Trisha, and thanks for taking the questions. Dave, hoping we could start with the subsegment in terms of electronics, so I’m thinking semiconductor versus passive products. It seems like the semi pieces continuing to hold up well or is passive is of course where the inventory rebalancing is happening. Can you just drill down on that semi piece, and just expand on to the extent you think what we’re seeing right now is sustainable? Thank you.

David Heinzmann: Sure, and lots of moving pieces in that kind of that world and that analysis. And so our passives businesses is certainly an area that had begun to rebalance on inventory a couple of quarters ago, and that continues to go through that rebalancing. The protection portion of our semiconductor had held in very strong and can continue to be quite strong. That has begun now go into a rebalancing mode. The power semiconductor portion of our business there has not been over inventory. That’s an area where there has been a little more challenge with the demand cycle over the last couple of years. And in that case, we continue to have very strong position there in inventory, if anything are a bit light in the power semiconductor world, so a bit of a mixed bag and moving pieces within that.

Luke Junk: And then similar question for transportation would be great to get some additional color on pass car versus commercial vehicles. So especially the latter, I think you mentioned some destocking at distributors in the commercial vehicle market?

David Heinzmann: Sure. We’ve been seeing that a bit in the last couple of quarters, particularly in the pass — in the passenger car side of the business, we continue to see inventory rebalancing in pass car in the first quarter. The good news is we think we’re through the bulk of it in the passenger car side of the business, but we think that’s largely behind us. There might be a little bit of noise, but for the most part, that’s behind us. Commercial vehicle is an area where certainly customer inventory — end-customer inventories as well as distributors have been a bit heavy. And we saw that declining in the first quarter and we do expect that to continue to decline and have correction in that inventory balances over the next quarter or two.

Luke Junk: Okay, thank you for that. And then if I can just sneak in one more. Meenal, I’d be great to get your perspective on the margin improvement that we’re seeing in Transportation initially. It is picking up sequentially consistent with your expectations. But what about the rate of margin improvement and how is that performing versus your expectation for margins? Sitting here in early May and should we be thinking that double digit margins are still on track for some time in the back half? Thank you.

Meenal Sethna: Yes. Great question, Luke. Here’s what I would say, right? We talked about sequential improvement in one of the earlier questions. I would say there is two pieces to the equation, there is what’s going on in the market and then there is actions that we’re taking. Dave just highlighted some comments that with some of the destocking going on that, of course, impacts our volume, our production levels, and that’s a bit of a headwind for us when that happens. And then just in general when it comes to the automotive market, while we feel — sometimes we feel good about the low 80 million car projection car build projection that’s out there, it’s still quite a bit lower than back in 2019, so I’d say the markets still remains a bit of a headwind for us in a few of those quarters.

At the same time, we are going to focus on the things that we can control. So there are several things that we’re doing. I talked a little bit earlier about some of the footprint consolidation work, whether it’s manufacturing, supply-chain, and other areas. So we continue to move forward on that, which is helping us. I’ve talked in the past several quarters about price and we’ve made good progress when it comes to discussions with customers pointing out our value that we bring to the table and then in terms of price that we’ve gotten and still in select areas price that we’re going after and then overall when we think about the synergies that we’re looking at with the collective commercial vehicle business as we’ve added Carling in the past year and there’s continues to be good opportunities there of things that we’ve done and continue to do both from a growth and just leverage perspective.

So, it still feel good about the trajectory that we expect to have going into the coming quarters.

Luke Junk: Thank you for that. I’ll leave it there.

Trisha Tuntland: Appreciate your questions, Luke. Thank you.

Operator: Our next question will come from the line of William Kerwin with Morningstar. Please go ahead.

Meenal Sethna: Good morning, Will.

William Kerwin: Hi, all. Hi, good morning. Thanks for the question. I was hoping to ask a little bit of a longer term one about the competitive landscape in electric vehicles, particularly in China. I’m curious how do you look at your positioning with Chinese or Asian OEMs versus those in North America and Europe? And then also, how you view the risk of disruption maybe from upstart competitors entering the electric vehicle space out of Asia?

David Heinzmann: Sure. We’ve talked about this in the past where we — the content opportunity for us in the high voltage side of an EV is significantly larger than in the overall 12-volt side of things. The good news is in EVs, the 12-volt systems largely remain intact. So therefore, our strong position in the low voltage side will continue. We don’t see that and that’s shifting or changing at all. We do expect and we’re having great progress on getting design-wins and shipping into the EV, the high voltage side of the business. We’ve been open about the fact that we don’t expect to have the same market share in the high voltage side as we do in the low voltage side. And we’re seeing that kind of play out as expected. We’re not the only people who are aware of electrification.

So there are more competitors focused on that. So therefore, we expect that lower market share, we still expect to be the leader in protection in the electrical systems, including the high voltage side and we’re seeing that play out. China specifically, you asked about it, and the difference between multinational OEMs versus local Chinese OEMs. Clearly on the EV side, there has been a very strong shift to the local OEMs winning and gaining share pretty meaningfully with customers like BYD and Geely and others. The good news is we have very strong working relationships there. So we’re not seeing a big negative shift for us in our opportunities there because of the shift from multinational to the local Chinese. We’ve been involved with them for many, many years.

And we’re continuing to have success with them.

William Kerwin: Okay, Excellent, thank you. And then a light pivot from my follow up, but curious if you could comment on sort of upward charging infrastructure, electric vehicle charging, it sounds like the Western acquisition plays into that a little bit. And don’t think we’ve heard too much about it, sort of the charging station opportunity over the past couple of quarters. So just curious if we could get an update on the strategy there?

David Heinzmann: Yes. No, absolutely, it’s a great question and you’re absolutely right. The Western Automation acquisition that we made, over 50% of the revenues in that business are being designed into and sold into EV off-board charging applications with particular strength in Europe they’re European company and so they have a strong relationships with the European OEMs that are manufacturing these charging systems. So that was certainly one of the strategies for us in that acquisition that it builds out a broader portfolio of components and modules that we can design into off-board charging. We’re seeing great success there and we’re excited about the opportunity because it strengthens our relationships with the OEMs in Europe through Western Automation and it broadens the technology offering that we can get to the remainder of our customer base, particularly where we have a lot of strength in North America and in Asia as well.

So we think that’s a meaningful opportunity for us over time and we’re already seeing some success with that.

William Kerwin: Excellent, thank you. I’ll jump back into the queue, but congrats again on a good quarter.

David Heinzmann: Thanks.

Trisha Tuntland: Thanks, Will. Appreciate your questions. We’ll take our next caller, please?

Operator: Your next question comes from the line of David Silver with CL King. Please go ahead.

Meenal Sethna: Good morning, David.

David Silver: Yes. Hi, good morning. Thank you. My first question is kind of a variation I think of some of the discussions on margin, but if I was just to focus on the Electronics segment, 25.1% this quarter operating margin. I believe, Dave has talked about maybe a mid-20s margin as being, “sustainable” and I would just say, the current environment is far from optimal yet you’re kind of it, a level that you’ve described as long term sustainable in the past. So just with that as background, I’m just wondering if the very strong margin performance in the current environment, is that a reflection of maybe one or two things. But one is that you are seeing some inventory liquidation and you talked about steady POS sales, I guess.

Is there something about the current sales that are happening that are structurally are meaningfully higher-margin than maybe the sales earlier in the let’s say in the pandemic when there were some buffer inventories built-up or would you say across your Electronics portfolio, it’s just structurally more broad-based and not specific to, let’s say, this phase of the overall cycle? Thank you.

Meenal Sethna: Sure. David, it’s Meenal, and maybe I’ll take this one a bit. So with Electronics and we’ve been talking in the past few years, where we’ve had some very — we had some quarters with some very strong margins and I have used the phrase, where all the stars aligned, right, where — because we’ve seen in an industry that typically you typically see price downs. Every year we’ve gone after price realization because of inflation in other areas. Combine that price with the volumes that we saw in the last couple of years, along with just that favorable mix coming through and we’ve seen some very strong margins. At the same time, I also said, that was not really a sustainable level for some of those areas, and I said really in this, I’ll call it this a bit of a rebalancing year, expected Electronics — the Electronics margins to stay over 20%, so we finished the quarter at 25%, little bit stronger than we had anticipated versus 90 days ago.

Dave highlighted a couple of things that while we see the channel rebalancing going on as we expected, we saw little better strength across our semiconductor side of the business itself more into the industrial space. So that’s been a positive. And frankly, I’d say, all the work that we’ve done over the past few years around operational execution, some footprint work, et cetera has really added to that elevated margin level, whereas we used to talk about the margin profile being upper-teens and then now I’m talking about it being over 20%, so I’d say for this year for 2023, we’ve talked about keeping that average margin over 20% and I feel good about that today.

David Silver: Okay. Okay, great. Thank you for that. I had a question maybe about the M&A side of things. So you’re currently integrating what I would consider two bigger than bolt-on type acquisitions, Western Auto and its bigger one C&K over the past, less than 12 months. And everybody asks about maybe the project funnel, but I would like to maybe just ask you about I guess your bandwidth or your integration capability here. So in other words, when you’re discussing that you maybe have some dry powder based on net debt-to-EBITDA, are you also thinking that internally your integration teams or you just your overall capability to deal with additional targets. I mean, do you have capability to continue to pursue opportunities here or is there kind of a theoretical or a practical limit on how many integration projects you want to handle at a particular time? Thank you.

David Heinzmann: Sure, thanks. Thanks, David. Clearly, M&A is a key part of our growth strategy and as an enabling part of our ability to drive growing and sustained organic growth for the business over time as well. So we view it very, very strategic. So, first and foremost, we look at M&A opportunities from a strategic fit to our strategies within the businesses. And although we have made some meaningful acquisitions over the last couple of years, some of them are very much bolt-ons like Western Automation is a fairly simple, straightforward one location type of business, both ride into our business unit that’s pretty straightforward. C&K is a lot more complex and takes a bit more to kind of work our way through that. The good news is we’re several months or quarters into that acquisition and seeing good progress there.

As I step back overall, thinking about the bandwidth of the organization absolutely as a piece of our analysis on our thought process on whether we do acquisitions or not. And what I would say is, they’re led by the business units themselves. So we have business units, which have lots of bandwidth right now to take on additional acquisitions and we have other business units, there may be for instance like electronics where they’re working through C&K, it’s a little more challenged. On that piece of it, it’s a kind of work through and it might take another couple of quarters before we feel comfortable with our bandwidth, but overall I would say as a company, our bandwidth is in a reasonable position where we can take on additional challenges and additional acquisitions if the right ones come along and there is a good strategic .

David Silver: Very good. I appreciate it. Thank you.

Trisha Tuntland: Appreciate your questions, David. We will take our next caller, please?

Operator: Our next question comes from the line of Patrick Schackart with Oppenheimer. Please go ahead.

Meenal Sethna: Good morning, Patrick.

Patrick Schackart: Good morning. Thanks for taking the question.

Meenal Sethna: Sure.

Patrick Schackart: You mentioned overall portfolio resiliency. Would you describe Electronics results as more resilient than expected? And Dave, you mentioned stable sell-through. Can you describe how durable you view sell-through characteristics as we move through the rest of the year?

David Heinzmann: Sure. Let me kind of start with the resiliency question. And if we step back and look at the whole company, for sure, we think the resiliency of kind of the business model that we’ve built out is actually improving and the markets that we’re serving and the diversity of the technologies and markets and applications that we’re serving put us in probably a better position than maybe we were even five years ago when we went through kind of correction cycles and things like that. So we think the resiliency of the business continues to be quite good. We also think within the electronics reporting segment, it also has improved. As Meenal kind of mentioned, so if you think about our power semiconductor portfolio that fits within the electronics reporting segment, that’s a high percentage of that is being sold into industrial applications, which tend to be a little more balanced and not quite as extreme in the cyclicality.

So I think that helps balance things out in there. Then kind of moving on to the POS and stability of that, we watch that very carefully. We don’t have tremendous visibility on what that’s going to be a quarter from now or six months from now. That’s a little hard to call. But we’ve seen it be hold up reasonably stable. And that’s kind of across the regions and the markets that we serve. So if we continue to see that stability, then we feel good about our ability to drive down inventories at a pretty good rate.

Patrick Schackart: Okay, thanks. And maybe for a follow-up, and conversely, wondering how you view the results of transportation versus the internal expectations heading into the quarter? And maybe you could elaborate on some of the market dynamics there and what you think needs to happen to resolve the weaker top line trends or if it’s largely just an inventory issue?

David Heinzmann: Yes. First of all, I have to kind of remind everyone that when you look at when we talk about passenger car and we talk about our transportation segment, let’s carve out the passenger car piece of it, which I think you’re kind of asking mostly about. But the passenger car side of our business, there’s a meaningful quarter of the revenues that we sell into passenger car applications to fall outside of our transportation segment. They come largely out of our electronics segment, but even some of it out of the industrial segment. So when we look at that and we talk about within Transportation segment, what are kind of our content story and our growth levels are, we have to take a step back and look at how we’re doing overall with pass car.

And if we look at overall on pass car, if we take out the impact, a small impact we had of FX, which is negative and inventory reductions we identified, we still, overall, as a company, across our portfolio at about a 6% outgrowth compared to car build. So we still feel good about the content story and the outgrowth opportunity for us in pass-car. Quarter-to-quarter, that can vary. Certainly, there’s inventory work that’s going on right now and reduction of inventories. That has an impact on it. But it also — unfortunately, it’s not clean enough. It shows up in other parts of the business as well. So what it does is it reinforces our continued belief that our outgrowth story remains robust. If you look over the last three years, we’ve had double-digit outgrowth.

We remain confident and our design wins continue to be extremely robust with the heavy emphasis, of course, coming from the electrification side on pass car. So we remain confident in this double-digit outgrowth as we look forward as well.

Patrick Schackart: Okay. Thanks for the color. I’ll pass it on.

Meenal Sethna: Thanks, Patrick. Appreciate your questions.

Operator: Our next question will come from the line of Joshua Buchalter with Cowen. Please go ahead.

Meenal Sethna: Hey, Josh.

Joshua Buchalter: Hey, thanks for letting me hop back in the queue. One follow-up. We’ve heard from a few industry players about the potential for power semiconductors to replace some of the passive electronics in the vehicle, such as diesels in low voltage relays. Given you’re well known for your passives in fuses, but also you have a portfolio of power semiconductors, including MOSFETs, I wanted to hear, I guess, one, is this a transition that you guys see taking place? And two, what are the longer-term potential impacts of this on your business given you’ve got business on both sides of that?

David Heinzmann: Sure. It’s good question. The kind of got to divide it up into pieces and applications within — in these markets. And so if you go back many years ago, there used to be passive components that were used to protect battery packs in a cellphone, right? And that did transition mainly to solid state sorts of protection in those applications. There is some shift in the low amperage low-voltage side of the business in a pass-car that has gone to a replacement for the relay, which we don’t produce. So kind of everywhere there’s a relay, there’s a fuse. So relays fuse combination. There’s been some movement towards solid state solutions there on small amperage ranges. That happens to be a very small part of our business today.

Will that maybe increase in amperage over the years, perhaps. But the growth of kind of where all of our growth, even in the low voltage side in automotive is really coming from kind of the mid-level amperage and high amperage applications, because the content a very small voltage small amperage device helps for a couple of pennies as opposed to a device that’s, say, a 30 amp device, which is going to be significantly higher value. So the bulk of our growth is coming from that midrange and upper range in power. And we’re not seeing shifts in that area. We do think in the high-voltage side, over time, there may be opportunities for some applications to kind of move towards solid state away from some of the relay types of products we have capabilities as our power semiconductor focuses on that medium-high power side of things.

There is opportunities potentially in the future as cost may improve to be able to do that, and that’s an area where we would certainly bring capabilities to support.

Joshua Buchalter: Appreciate all the color there, Dave. Actually one more follow-up, if I can. Can you — did you — I apologize if I missed this, but can you let us know how much Western Automation was included in the second quarter guide, if at all?

Meenal Sethna: Yes. I mean, overall, we talked about the business being about $25 million in annualized revenue. So you can think of it as mid-single digit revenue in there, but it’s pretty small.

Joshua Buchalter: Got it. Thank you.

Trisha Tuntland: I appreciate you. We are proud of questions, Josh. Thank you. We’ll take our next caller, please?

Operator: Your next question comes from the line of David Williams with Benchmark. Please go ahead.

Meenal Sethna: Hi, David.

David Williams: Thanks. Hey, thanks for let me ask another question. I really appreciate it. Just wanted to kind of think about the customer tone overall and thinking about maybe the second half. It seems like things have been a little more pessimistic in terms of a second half kind of a macroeconomic perspective. But do you get a sense that maybe the destocking levels could be approaching levels that may be below kind of normal trend line where we could get an opportunity for some replenishment above expectations if the second half does perform a little better than expected?

David Heinzmann: The first thing I would say, David, is that our visibility in the second half is pretty limited. So it’s a pretty dynamic environment that we’re selling into these days. So we really haven’t given a lot of color on what we see as the second half. Just hard to get a good handle on that and view of that. Clearly, we believe inventory rebalancing will continue into the second half. So as much as I’d like to think it’s done, and we’re back to — through that, we still got some progress to make there over the next few months. And so therefore, we do expect that into the back half of the year. You’re absolutely right that inventory reductions, the inefficiency, the ability to build inventories and then reduce inventories and the distribution channels, taking electronics is a very inefficient process.

So when we do hit the bottom and get to the inventory levels where we need them to be and if end markets begin to show any signs of improvement, for sure, we’ll see a bounce off of the bottom. That will happen. Just when will that happen, I think it’s difficult to call at this point.

David Williams: Okay. No, that’s very helpful. But I guess from a customer perspective, do you think they’re being rational in the level of depletion that they’re trying to get inventories to or do you think that’s falling below where you would typically see?

David Heinzmann: No. I think they’re being rational, and it’s kind of as expected. And unfortunately, I’ve lived through a lot of these situations where we’ve gone through inventory rebalancing and the behavior is pretty normal and kind of as expected.

David Williams: Fantastic. Well, thanks again for the time. I certainly appreciate it.

David Heinzmann: Sure.

Trisha Tuntland: Sure. We appreciate your follow-up questions, David. That concludes our Q&A session. Thank you for joining us on today’s call and your interest in Littelfuse. We look forward to speaking with you during the May 8th Oppenheimer Industrial Growth Conference and May 31st TD Cowen Technology, Media and Telecom Conference. Have a great day.